Saturday, 14 September 2013

IPhone - Why such high ASP?

A Smartphone cost for a consumer over its life is:

Upfront cost of buying

Data and Voice service

Content cost (Apps, could be one time or periodically like in digital media or both)

Today,
Apple’s iphone major revenue share is driven through combination of 1
& 2 in post-paid/contract dominant market where it Network uses the
iphone as demand generation catalyst which it fulfills by its supply of
services reflected in higher ARPU. This has been used twice in rolling
out 3G and now LTE services. It is a moot point but going by evidence
available before iphone (especially in 3G rollouts in Europe where
demand did not increase to meet the supply) that in absence of this new
demand the rollouts would have been spread over longer time period.

This
is nice virtuous circle as long as it continues to work, since it is
demand led hence allowing the Network provider’s to command a premium
which would not be the case if it was supply driven i.e. if by infusing
new technology Network provider would have hoped for demand of its
services.

Smartphone/Iphone

In
US, current wireless ARPU (subscriber based) is $69 for 2012 which is
for both feature and smart phone users, if only smart phone users are
taken then this would definitely be around $90 which would mean that for
the tenure of contract a subscriber is worth $2160 of which $1100 is
attributable to smart phone based data usage. This additional revenue
is basically getting shared between Network provider and phone
manufacturer (Apple).

The
best example for understanding the subsidy cost is the ipad, it has the
same appeal /game changing innovation when introduced and has identical
content available through the iOS platform but the crucial difference
is from Apple perspective is that consumer and the customer are same and
no dichotomy like it is there in iphone.

Ipad
although having a premium price compared to its competition does not
have high operating margin of iphone. This the model that will be
prevalent when smart phone reaches maturity, and the same model will
work in pre-paid or low ARPU markets.

Content Services

The
third leg of this stool is Content providers (include app developer)
who would like to be part of the eco-system and are willing to share
revenue with eco-system owners. The content provider the way they have
evolved are independent of Network providers i.e. no commercial
relationship between them or any cross-subsidies. [This could
potentially change in future if some content requires specific network
quality/quantity for e.g. an HD movie streaming might involve paying to
network provider temporarily sort of on-demand network charges, more in
pre-paid rather than in contract market.]

The three eco-systems that are dominant currently are:

Apple – comprising of iOS/itune

Google – Android

Amazon (not in smart phone world currently)

(Windows Mobile is also in reckoning but has not been successful in building a momentum)

Currently,
this does not represent a substantial source of revenue for Apple (as
content provider are not solely dependent on eco-system but could
deliver the services over open Web) but this has important criteria in
eco-system’s success which are

Stickiness:
once a consumer setup their digital content which could be around media
publications, photo management, music/movie services, social media etc.
It makes them reluctant to move out and reduces the churn.

Demand generation: The more content a user consumes they are likely to increase their network ARPU.

Additional Revenue: A stream of revenue that that has highest upside potential in future as device and network growth matures

Eco-system/Cloud
services: These are services such as Mail/Calendar/Document Apps
(spreadsheets etc)/ Maps which would be provided by Eco-systems owners
to distinguish it from others.

Ad
Revenue: through collection of humongous behavioral information many
times with implicit consent. Of course, this will be combined with
information gathered through non-smart phone based behavioral pattern to
provide a complete picture.

Currently,
this does not translate directly into a major stream for Apple as its
major revenue stream is from upfront purchase and Network provider
subsidies. On the other hand Google and Amazon whose business models
have relied on Web services revenue stream have unsurprisingly put major
emphasis on this stream. (Google keeps its Android platform free and
Amazon keeps it device at almost zero operating margin)

High ASP: How long?

As
long as the previous virtuous cycle continues where network can
continue to move their customers on higher ARPU they would be willing to
subsidize. The basic question is for how long and to attempt to predict
we need to understand that currently

USA
has smart phone penetration of 56% (May 2013) and saturation may be
expected at somewhere in 85% range (9% currently do not own a mobile
phone). This would mean USA has still approx. 2 year to reach that
stage.

LTE
subscriber amounts to only 20% of total subscriber, this increases the
ARPU further and potentially could take 3-4 years for majority of smart
phone subscribers to be on LTE

Currently,
there is not any specific “killer application” that could not be
sufficed by LTE so once the above two is done smart phone market would
be in the mature phase.

The
downside specifically for iphone is that it is device primarily owned
by educated and moneyed segment which has a higher propensity to consume
and majority of them would already be owning one, so that leave the
consumers who are not technology faddists and are likely to spent less
on their network plan. How much would the network providers be ready to
subsidize this group?

This
is very difficult to answer but the best case scenario (for Apple)
would be for next 2-3 years. The clear signal would be that device life
cycle would increase (Apple is admitting in this year release that the
iphone 5 is good enough with plastic covers, only serious gaming and
photography enthusiast may pay the 15% premium for 5S).

Another
unpredictable is competition as differential in both phone and
eco-system is fast reducing and this would provide more negotiation
power to network providers to reduce their cost basically phone subsidy.

Apple
has consciously taken a decision to ignore or low priortize pre-paid
segment as in their opinion they can always play this game when the
growth matures in high ARPU markets. They could have segmented a device
for prepaid mkts but that would have probaly affected the halo on the
premium tag in USA or developed mkts.